Surviving Dell in an Apple World

Wednesday

May 23, 2012 at 12:01 AMMay 23, 2012 at 11:10 PM

Dell gaps lower after a disappointing earnings release.

Robert Weinstein

NEW YORK (TheStreet) -- If you're a current DELL (:DELL) investor, last night's earnings release must have felt like putting the finishing touches on a 10-page report and getting the blue screen of death.

Based on my experience with gap downs following earnings reports similar to Dell's, the odds favor Thursday or Friday marking the short-term low. It's not quite time to wish for a price above the closing before earnings of $15.05, but Dell does have strong support near $12. Friday or early next week will likely find bargain hunters picking up shares cheap to flip over. If Friday appears to be closing below Thursday's low, I may join with the bargain hunters for a quick hit-and-run weekend carryover.

Bargain hunters and short sellers covering positions could push the price up about 50% in relation to the gap down price. Looking at the chart, I expect short-term resistance near $14.28. Round numbers often attract like a price magnet and repel, causing a bounce. Expect a lot of volume to trade near $13 a share today, but also be prepared for a closing under $13.30, and more than a 25% chance of a close under $13.

If you are looking for today's drop to signal a buying opportunity, you are likely going to find the end of the day Thursday or Friday better than today. There is no hurry jumping on board with Dell. Stocks dumping as a result of earnings misses usually take a full two good earnings quarters to recover. Take your time and do your homework before allocating capital here. Look for the second break above $14.50 as the one that "sticks."

Want to see a classic miss earnings result a few weeks after the fact? Take a look at Pandora (:P). Pandora disappointed and traded from $14 down to an intraday low under $8. Also, take close note of the next few days after earnings. This is a classic pattern I see often, and you can, too. Simply use your software to look at charts from the past few quarters and review the ones that gapped down the next day. The high placed a couple of days after the gap down in Pandora is now resistance.

Pandora also took more than two months in recovery to reach the gap down price. Pandora, like Dell, will take about six months to trade again at pre-gap pricing, if the next two reports are favorably received by investors. I love listening to Pandora, but I am not ready to invest just yet.

Another more recent example is J.C. Penney (:JCP). In the case of JCP, the price gaps down in what I call a gap +1. Gapping down and trading another day lower, closing near the lows in both. Also notice the opening price is well off the highs, with the highs of a close higher than the open about 30% (expect today's closing price of Dell to be near or lower than the open).

We have our answer to why Dell's report doesn't compute. Microsoft's Windows 8 may have a slight impact. However, Apple's (:AAPL) iPad and tablets are eating Dell's lunch. After Apple produced one of the greatest earnings beat in the history of tech, it doesn't take a leap of understanding to figure out someone was going to end up short.

Last quarter Apple's revenue was just short of $40 billion, an increase of 59% over the same period last year. The biggest product is the iPhone, but Apple is firing on all cylinders. Apple also had record computer sales in the quarter, selling 4 million Macs. This represents an increase of 7% over the same quarter last year. If a worldwide 2% computer growth is expected and Apple is growing 7%, you can see a problem for Dell rather quickly.

What's the best play with Dell? There should be a very attractive trade coming up Thursday and/or Friday. Near the end of the day if still trading lower, sell out of the money puts. Fear of continued losses tends to push portfolio insurance prices up dramatically, while at the same time the stock should bottom. It's not one to get greedy with, hold on for a few days and as the implied volatility falls (hopefully with a nice dead cat bounce) exit out with a quick hit and run for profits. Otherwise for longer-term investors, the best play is to wait until we are closer to the next earnings release for an entry.